Genetic studies have shown that ubiquitination and endocytosis of the Drosophila ligand Delta in signal-sending cells are required for activation of Notch signaling, but how these events promote Notch activation remains poorly understood. Here, we show that an ubiquitination-defective mutant of the murine Delta-homologue Dll1 is endocytosed but, in contrast to the wild-type Dll1, is unable to subsequently recycle back to the cell surface or to bind Notch1 efficiently. These results demonstrate that ubiquitination, although not required for endocytosis, is essential for Dll1 recycling and that recycling is required to acquire affinity for the receptor. On the other hand, a chimeric molecule encompassing the extracellular domain of Dll1 and the transmembrane/intracellular domain of Dll3, which contains no lysine, is endocytosed, recycled, and interacts with Notch1 but is unable to induce transendocytosis of the extracellular region of Notch1 or to signal. These observations suggest that the chimera uses an ubiquitination-independent signal to recycle, allowing it to acquire affinity for Notch1. Our results support the idea that ligand recycling determines its competence to bind efficiently to the receptor but that this is insufficient to allow it to perform transendocytosis, an event required for activation of Notch signaling. Finally, the present study indicates that Dll1 partially localizes to lipid microdomains, whereas both ubiquitination-defective Dll1 and the Dll1-3 chimera are excluded from these compartments, suggesting that these microdomains provide the environment necessary for Dll1 to activate Notch signaling.